Exam 1 FIN 218

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later? A. 5 percent B. 10 percent C. -5 percent D. 25 percent E. None of these

25 percent

Which of the following $1,000 face value securities has the highest yield to maturity? A. A 5 percent coupon bond selling for $1,000 B. A 10 percent coupon bond selling for $1,000 C. A 12 percent coupon bond selling for $1,000 D. A 12 percent coupon bond selling for $1,100

A 12 percent coupon bond selling for $1,000

Holding everything else constant, an increase in wealth lowers the quantity demanded of an asset. True or False

False

Holding everything else constant, as the dollar strengthens foreigners will buy more U.S. exports. True or False

False

In a recession, when income and wealth are falling, the demand for bonds falls, and the demand curve shifts to the right. True or False

False

In recent years, financial markets have become more risky. However, only a limited number of tools (such as derivatives) are available to assist in managing this risk. True or False

False

It is probably a good use of an investor's time to watch as many shows featuring technical analysts as possible. True or False

False

The Internet stock market bubble of the late 1990s led to one of the worst financial crises in U.S. history. Banks lost billions of dollars as Internet companies went bankrupt. True or False

False

The New York Stock Exchange is an example of a primary market. True or False

False

The capital market is a financial market in which only short-term debt instruments (generally those with an original maturity of less than one year) are traded. True or False

False

The concept of present value tells you that a dollar in the future is not as valuable to you as a dollar today because you can earn interest on this dollar. Therefore, nominal interest rates can never be negative. True or False

False

The difference between the ex ante interest rate and the ex post interest rate is known as the Fisher effect. True or False

False

The failure of Ohio Life Insurance and Trust in 1857 did not signal the start of a recession due to prompt actions by the Fed. True or False

False

The government agency that insures each depositor at a commercial bank, savings and loan association, or mutual savings bank up to a loss of $100,000 per account ($250,000 for individual retirement accounts) is the Securities and Exchange Commission (SEC). True or False

False

The problem of adverse selection helps to explain why direct finance is more important than indirect finance as a source of business finance. True or False

False

The process of financial intermediation is also known as direct finance. True or False

False

The risk premium on corporate bonds becomes smaller as the liquidity of the bonds falls. True or False

False

The term structure of interest rates describes how interest rates move over time. True or False

False

Unlike regulations in other countries, there are very few federal regulations governing who is allowed to set up a financial intermediary. True or False

False

When yield curves are downward-sloping, long-term interest rates are above short-term interest rates. True or False

False

An increase in the marginal tax rate would likely increase the demand for municipal bonds, and decrease the demand for U.S. government bonds. True or False

True

An indexed bond is a bonds whose interest and/or principal payments are adjusted for changes in the price level. True or False

True

Asset pricing bubbles, where the prices of assets rise well above their fundamental values, casts serious doubt on the stronger view that financial markets are efficient. True or False

True

Bank failures have been a feature of all U.S. financial crises from 1800 to 1944. True or False

True

Collateralized debt is also called secured debt. True or False

True

Different interest rates have a tendency to move in unison. True or False

True

Diversification is almost always beneficial to the risk-averse investor, since it reduces risk unless returns on securities move perfectly together. True or False

True

During a bank panic, many banks fail in a very short time period. True or False

True

During the budget negotiations in Congress in 1995-1996, and then again in 2011-2013, the Republicans threatened to let Treasury bonds default, and this had an impact on the bond market. True or False

True

Equity contracts are subject to a particular type of moral hazard called the principal-agent problem. True or False

True

Equity represents an ownership interest in a firm and entitles the holder to the residual cash flows. True or False

True

Factors that can lead to worsening conditions in financial markets include increasing interest rates and asset price booms. True or False

True

Financial innovation has provided more options to both investors and borrowers. True or False

True

Financial institutions are among the largest employers in the country and frequently pay very high salaries. True or False

True

From 2001 to 2008, the dollar depreciation substantially True or False

True

From 2007 to 2009, the U.S. economy was hit by the worst financial crisis since the Great Depression. True or False

True

Housing prices boomed from 2002 to 2006, fueling the market for subprime mortgages and forming an asset-price bubble. Housing prices began declining in 2006, falling by more than 30%, which led to defaults by subprime mortgage holders. True or False

True

If the markets are efficient, the optimal investment strategy will be to buy and hold so as to minimize transaction costs. True or False

True

Increasing duration implies that interest-rate risk has increased. True or False

True

Interest rates are determined in the bond markets. True or False

True

Investors make their choices of which assets to hold by comparing the expected return, liquidity, and risk of alternative assets. True or False

True

Loss aversion means the unhappiness a person feels when he or she suffers a monetary loss exceeds the happiness the same person experiences from receiving a monetary gain of the same amount. True or False

True

Most legal work in the U.S. involves the writing and enforcement of contracts, not ambulance chasing, criminal law, and frivolous lawsuits. True or False

True

State-owned banks in developing countries have little incentive to allocate their capital to the most productive uses. True or False

True

The Sarbanes-Oxley Act of 2002 established a Public Company Accounting Oversight Board (PCAOB), overseen by the SEC, to supervise accounting firms and ensure that audits are independent and controlled for quality. True or False

True

The concept of adverse selection helps explain why collateral is an important feature of many debt contracts. True or False

True

The duration of a portfolio of securities is the weighted average of the durations of the individual securities, with the weights reflecting the proportion of the portfolio invested in each. True or False

True

The efficient market hypothesis does not have to imply that financial markets are efficient. True or False

True

The evidence suggests technical analysts are not superior stock pickers. True or False

True

The interest rates on bonds of different maturities tend to move together over time. True or False

True

The real interest rate is equal to the nominal rate minus inflation. True or False

True

The risk of a well diversified portfolio depends only on the systematic risk of the assets in the portfolio. True or False

True

When a bond defaults, the issuer of the bond is unable or unwilling to make interest payments when promised or to pay off the face value when the bond matures. True or False

True

When income and wealth are rising, the demand for bonds rises and the demand curve shifts to the right. True or False

True

he price of gold should be positively related to the expected inflation rate. True or False

True

if the seIf security markets are truly efficient, there is no need to pay for help selecting securities. True or False

True

A situation in which the price of an asset differs from its fundamental market value

need not indicate that unexploited profit opportunities exist.

A moderately upward-sloping yield curve indicates that short-term interest rates are expected to

neither rise nor fall in the near future.

Tests used to rate the performance of rules developed in technical analysis conclude that

technical analysis does not outperform the overall market.

Evidence against market efficiency does not include

technical analysis.

A debt contract is said to be incentive compatible if

the borrower's net worth reduces the probability of moral hazard.

Net worth

the difference between assets and liabilities

Monetary policy is chiefly concerned with

the level of interest rates and the nation's money supply

When the growth rate of the money supply increases, interest rates end up being permanently lower if

the liquidity effect is larger than the other effects

The risk structure of interest rates is

the relationship among interest rates of different bonds with the same maturity

The bond markets are important because

they are the markets where interest rates are determined

Compared to interest rates on long-term U.S. government bonds, interest rates on ________ fluctuate more and are lower on average.

three month treasury bonds

Another way to state the efficient market condition is that in an efficient market,

unexploited profit opportunities will be quickly eliminated.

The spread between interest rates on low-quality corporate bonds and U.S. government bonds ________ during the Great Depression.

widened significantly

The principal-agent problem

would not arise if the owners of the firm had complete information about the activities of the managers

Economies of scale

can be used to an advantage by reducing transaction cost.

Wealth, either financial or physical, that is employed to produce more wealth is referred to as

capital

Based on the expectations hypothesis, the steep upward sloping yield curve in June of 2013 indicted that short-term rates would ________ in the future.

climb

Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called

collateral

The largest depository institution (value of assets) at the end of 2012 was

commercial banks

A ________ is when one party in a financial contract has incentives to act in its own interest rather than in the interests of the other party.

conflict of interest

Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is

consistent with the efficient market hypothesis if the earnings were not as high as anticipated.

Leading up to the 2007-2009 Financial Crisis, companies like AIG developed financial products divisions which wrote billions of dollars worth of financial insurance contracts, called ________, which later bankrupted the company.

credit default swaps

The process of deleveraging refers to

cutbacks in lending by financial institutions.

What is the model whose equations are estimated using statistical procedures used in forecasting interest rates called?

econometric model

The reduction in transaction costs per dollar of transactions as the size (scale) of transactions increases is known as

economies of scale

The risk premium on corporate bonds becomes smaller if

either the liquidity of corporate bonds increases or the riskiness of corporate bonds decreases occur.

The interest rate that is adjusted for actual changes in the price level is called the

ex post real interest rate

Banks, savings and loan associations, mutual savings banks, and credit unions

have been adept at innovating in response to changes in the regulatory environment

Economists' attempts to explain the term structure of interest rates

illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence.

Stock market declines preceded a full-blown financial crisis

in the United States in 1929.

When bond prices become less volatile, the demand for bonds ________ and the interest rate ________. A. increases; rises B. increases; falls C. decreases; falls D. decreases; rises

increases ; falls

Interest rates are important to financial institutions since an interest rate increase ________ the cost of acquiring funds and ________ the income from assets.

increases ; increases

When the economy enters into a boom, normally the demand for bonds ________, the supply of bonds ________, and the interest rate A. increases; increases; rises B. decreases; decreases; falls C. increases; decreases; rises D. decreases; increases; rises

increases; increases; rises

The SEC restricts trading by the largest stockholders (known as ________) in corporations issuing securities.

insiders

The riskiness of an asset's return that results from interest rate changes is called

interest rate risk

During the 1800s, many U.S. financial crises were precipitated by an increase in ________, often originating in London.

interest rates

According to the expectations theory of the term structure,

interest rates on bonds of different maturities move together over time.

Holding everything else constant, a decrease in the money supply causes

interest rates to increase initially

The Global Legal Settlement of 2002 dealt with conflicts of interest in

investment banks

The efficient market hypothesis suggests that

investors should purchase no-load mutual funds, which have low management fees.

A security

is a claim on the issuers future income

The efficient market hypothesis suggests that allocating your funds in the financial markets on the advice of a financial analyst

is not likely to prove superior to a strategy of making selections by throwing darts at the financial page.

If a bond has a favorable tax treatment, its required interest rate (all else equal)

it will be lower

Bonds with relatively high risk of default are called

junk bonds

The pecking order hypothesis predicts that the ________ a corporation is, the more likely it will be to ________.

larger and more well known; issue securities

When the growth rate of the money supply is decreased, interest rates will rise immediately if the liquidity effect is ________ than the other effects and if there is ________ adjustment of expected inflation. A. larger; rapid B. larger; slow C. smaller; slow D. smaller; rapid

larger;slow

Dollars received in the future are worth ________ than dollars received today. The process of calculating what dollars received in the future are worth today is called ________.

less ; discounting

A $10,000, 8 percent coupon bond that sells for $10,100 has a yield to maturity A. equal to 8 percent. B. greater than 8 percent. C. less than 8 perfect. D. that cannot be calculated.

less than 8 perfect

Keynes's liquidity preference framework, individuals are assumed to hold their wealth in two forms:

money and bonds

Compared to interest rates on long-term U.S. government bonds, interest rates on three-month Treasury bills fluctuate ________ and are ________ on average.

more; lower

When the yield curve is inverted, the yield curve is

downward-sloping.

Discounting the future is the procedure used to find the future value of a dollar received today. True or False

False

If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is A. $650. B. $1,300. C. $130. D. $13. E. None of these.

$650

With an interest rate of 6 percent, the present value of $100 received one year from now is approximately A. $106. B. $100. C. $94. D. $92.

$94

(I) The total cost of carrying out a transaction in financial markets increases proportionally with the size of the transaction. (II) Financial intermediaries facilitate diversification when an investor has only a small sum to invest. A. (I) is true; (II) false. B. (I) is false; (II) true. C. Both (I) and (II) are true. D. Both (I) and (II) are false.

(I) is false; (II) true.

(I) In the United States, nonbank loans are the most important source of external funds for nonfinancial businesses. (II) In Germany and Japan, issuing stocks and bonds is the most important source of external for nonfinancial businesses. A. (I) is true, (II) false. B. (I) is false, (II) true. C. Both are true. D. Both are false.

(I) is true, (II) false.

(I) Debt markets are often referred to generically as the bond market. (II) A bond is a security that is a claim on the earnings and assets of a corporation.

(I) is true, (II) is false

(I) Banks are financial intermediaries that accept deposits and make loans. (II) The term "banks" includes firms such as commercial banks, savings and loan associations, mutual savings banks, credit unions, insurance companies, and pension funds.

(I) is true, (II), false

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 one year later? A. 5 percent B. 10 percent C. -5 percent D. -10 percent E. None of these

-5 percent

(I) Prices of longer-maturity bonds respond more dramatically to changes in interest rates. (II) Prices and returns for long-term bonds are less volatile than those for short-term bonds. A. (I) is true, (II) false. B. (I) is false, (II) true. C. Both are true. D. Both are false.

. (I) is true, (II) false.

Approximately how large was the U.S. subprime mortgage market in 2007?

1 trillion

Of the sources of external funds for nonfinancial businesses in the United States, stocks account for approximately ________ of the total.

10%

From the peak of the housing bubble in Q2 of 2006, to the trough in Q1 of 2009, the Case-Shiller housing price index fell by just over A. 15%. B. 20%. C. 25%. D. 30%.

30%

Despite austerity measures to dramatically cut government spending and raise taxes, interest rates on Greek debt soared, eventually rising to nearly ________, and the debt-to-GDP ratio climbed to ________ of GDP in 2012. A. 40%; 125% B. 40%; 160% C. 15%; 120% D. 25%; 100%

40%; 160%

U.S. Stock prices (as proxied by the DJIA) fell by ________ from October 2007 to March 2009. A. 45% B. 50% C. 55% D. 60%

50%

During the Financial Crisis of 2007-2009, the Dow Jones Industrial Average fell to a low near

6,600

The Baa-U.S. Treasury spread was about 2% at the beginning of 1929. By December 1932, the Dow Jones Industrial Average reached a low, and the spread had increased to how much? A. 4% B. 6% C. 8% D. 10%

8%

From its peak in 1929 to the trough in December 1932, the Dow Jones Industrial Average fell how much?

90%

Evidence that a mutual fund has performed extraordinarily well in the past contradicts the efficient market hypothesis. True or False

False

Which of the following can be described as involving direct finance? A. A corporation's stock is traded in an over-the-counter market. B. A corporation buys commercial paper issued by another corporation. C. A pension fund manager buys commercial paper from the issuing corporation. D. Both A corporation's stock is traded in an over-the-counter market and A corporation buys commercial paper issued by another corporation. E. Both A corporation buys commercial paper issued by another corporation and A pension fund manager buys commercial paper from the issuing corporation.

A corporation buys commercial paper issued by another corporation.

What is a collateralized debt obligation?

A tranche of an SPV that has been setup based on default risk

Which of the following are true for a coupon bond? A. When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. B. The price of a coupon bond and the yield to maturity are positively related. C. The yield to maturity is greater than the coupon rate when the bond price is above the par value. D. All of these are true. E. Only When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate and The price of a coupon bond and the yield to maturity are positively related are true.

A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.

Factors that cause the demand curve for bonds to shift to the left include A. an increase in the inflation rate. B. an increase in the liquidity of stocks. C. a decrease in the volatility of stock prices. D. All of these. E. None of these.

All of these

How expectations are formed is important because expectations influence A. the demand for assets. B. bond prices. C. the risk structure of interest rates. D. the term structure of interest rates. E. All of these.

All of these

Important implications of the efficient market hypothesis include which of the following? A. Future changes in stock prices should, for all practical purposes, be unpredictable. B. Stock prices will respond to announcements only when the information in these announcements is new. C. Sometimes a stock price declines when good news is announced. D. All of these. E. Only Future changes in stock prices should, for all practical purposes, be unpredictable and Stock prices will respond to announcements only when the information in these announcements is new.

All of these

In an advanced economy, a financial crisis can begin in several ways, including A. mismanagement of financial liberalization or innovation. B. asset pricing booms and busts. C. an increase in uncertainty caused by failure of financial institutions. D. All of these.

All of these

Evidence that stock prices sometimes fall when a firm announces good news contradicts the efficient market hypothesis. True or False

False

Which of the following are generally true of all bonds? A. The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period. B. A rise in interest rates is associated with a fall in bond prices, resulting in capital losses on bonds whose term to maturities are longer than the holding period. C. The longer a bond's maturity, the greater is the price change associated with a given interest rate change. D. All of these are true. E. Only The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period and A rise in interest rates is associated with a fall in bond prices, resulting in capital losses on bonds whose term to maturities are longer than the holding period are true.

All of these are true

A weaker dollar benefits ________ and hurts ________.

American businesses ; American consumers

________ was the stock market's worst one-day drop in history in the 1980s.

Black Monday

(I) A bond is a debt security that promises to make payments periodically for a specified period of time. (II) A stock is a security that is a claim on the earnings and assets of a corporation.

Both are true

(I) A simple loan requires the borrower to repay the principal at the maturity date along with an interest payment. (II) A discount bond is bought at a price below its face value, and the face value is repaid at the maturity date. A. (I) is true, (II) false. B. (I) is false, (II) true. C. Both are true. D. Both are false.

Both are true

(I) The risk premium widens as the default risk on corporate bonds increases. (II) The risk premium widens as corporate bonds become less liquid. A. (I) is true, (II) false. B. (I) is false, (II) true. C. Both are true. D. Both are false.

Both are true.

Debt deflation refers to the decline in debt values as creditors agree to lower interest rates as an alternative to defaults. True or False

False

________ are investment advisory firms that rate the quality of corporate and municipal bonds in terms of probability of default.

Credit-rating agencies

What is a credit boom? A. An explosion in a credit cycle, which can increase or decrease lending in the short-run B. Essentially a lending spree on the part of banks and other financial institutions C. When credit card receivables rise due to low initial interest rates D. The signal of the end of a credit spree, with credit contracting rapidly

Essentially a lending spree on the part of banks and other financial institutions

Foreign currencies that are deposited in banks outside the home country are known as

Eurocurrencies

A bonds with a 5% coupon as has a yield to maturity of 5%. True or False

False

Although the internet has changed many aspects of our lives, it hasn't proven very useful for collecting and/or analyzing financial and economic data. True or False

False

American investors pay attention to only the Dow Jones Industrial Average. True or False

False

An asset should be priced so that is has a higher expected return when it has a greater risk in isolation. True or False

False

An increase in the inflation rate will cause the demand curve for bonds to shift to the right. True or False

False

An unusual feature of the "Great Recession" in the U.S. from 2007-2009 was that the crisis did not spread to European nations. True or False

False

Bonds with a maturity that is longer than the holding period have no interest-rate risk. True or False

False

The central bank of the United States is

Federal Reserve

The organization responsible for the conduct of monetary policy in the United States is the

Federal Reserve System

After 2002, the ________ handle(s) a larger share of initial public offerings (IPOs) of stock than do/does the ________.

London and Hong Kong stock exchanges; New York Stock Exchange

Which of the following long-term bonds should have the lowest interest rate?

Municipal bonds

If the expected path of one-year interest rates over the next four years is 5 percent, 4 percent, 2 percent, and 1 percent, then the pure expectations theory predicts that today's interest rate on the four-year bond is A. 1 percent. B. 2 percent. C. 4 percent. D. None of these.

None of these

Which of the following types of information will most likely enable the exploitation of a profit opportunity? A. Financial analysts' published recommendations B. Technical analysis C. Hot tips from a stockbroker D. None of these

None of these

Which of the following are true for a coupon bond? A. When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. B. The price of a coupon bond and the yield to maturity are negatively related. C. The yield to maturity is greater than the coupon rate when the bond price is above the par value. D. All of these are true. E. Only When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate and The price of a coupon bond and the yield to maturity are negatively related are true.

Only When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate and The price of a coupon bond and the yield to maturity are negatively related are true.

In which of the following situations would you prefer to be borrowing? A. The interest rate is 9 percent and the expected inflation rate is 7 percent. B. The interest rate is 4 percent and the expected inflation rate is 1 percent. C. The interest rate is 13 percent and the expected inflation rate is 15 percent. D. The interest rate is 25 percent and the expected inflation rate is 50 percent.

The interest rate is 25 percent and the expected inflation rate is 50 percent.

A bond with default risk will always have a positive risk premium, and an increase in its default risk will raise its risk premium. True or False

True

A credit spread is the difference between the interest rate on loans to businesses and the interest rate on completely safe assets that are sure to be paid back. True or False

True

A critical function of financial markets is an efficient allocation of capital. True or False

True

Adverse selection refers to those with high credit risks, being most aggressive in their search for funds. True or False

True

American businesses use stock to finance about 11 percent of their external financing. True or False

True

An increase in income tax rates will cause the interest rates on tax-exempt municipal bonds to fall relative to the interest rate on taxable corporate securities. True or False

True

Although the verdict is not yet in, the available evidence indicates that, for many purposes, the efficient market hypothesis is

a good starting point for analyzing expectations.

A clause in a mortgage loan contract requiring the borrower to purchase homeowner's insurance is an example of

a restrictive covenant

Adverse selection and moral hazard problems increased in magnitude during the early years of the Great Depression as A. stock prices declined to 10 percent of their levels in 1929. B. banks failed. C. the aggregate price level declined. D. a result of all of these. E. a result of stock prices declined to 10 percent of their levels in 1929 and banks failed.

a result of all of these

Rules used to predict movements in stock prices based on past patterns are, according to the efficient markets theory,

a waste if time

The average lifetime of a debt security's stream of payments is calculated as the debt's

duration

When the interest rate on a bond is ________ the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________. A. above; demand; fall B. above; demand; rise C. below; supply; fall D. above; supply; rise

above;demand;fall

When the price of a bond is ________ the equilibrium price, there is an excess supply of bonds and the price will ________. A. above; rise B. above; fall C. below; fall D. below; rise

above;fall

The Sarbanes-Oxley Act of 2002 dealt with conflicts of interest in

accounting firms

If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of

adverse selection

When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, ________ is said to exist.

adverse selection

The impact of the 2007-2009 financial crisis was widespread, including A. the first major bank failure in the UK in over 100 years. B. the failure of Bear Stearns, the fifth-largest U.S. investment bank. C. the bailout of Fannie Mae and Freddie Mac by the U.S. Treasury. D. All of these. E. only the failure of Bear Stearns, the fifth-largest U.S. investment bank and the bailout of Fannie Mae and Freddie Mac by the U.S. Treasury.

all of these

The problem of adverse selection helps to explain A. why banks prefer to make loans secured by collateral. B. why banks have a comparative advantage in raising funds for American businesses. C. why borrowers are willing to offer collateral to secure their promises to repay loans. D. All of these. E. only why banks prefer to make loans secured by collateral and why banks have a comparative advantage in raising funds for American businesses.

all of these

Which of the following are accurate statements concerning the role that restrictive covenants play in reducing moral hazard in financial markets? A. Covenants reduce moral hazard by restricting borrowers' undesirable behavior. B. Covenants require that borrowers keep collateral in good condition. C. Covenants require periodic accounting statements and income reports. D. All of these. E. Only Covenants reduce moral hazard by restricting borrowers' undesirable behavior and Covenants require that borrowers keep collateral in good condition.

all of these

Which of the following is not a regulator of part of the U.S. financial system? A. National Credit Union Administration B. Securities and Exchange Commission C. Federal Reserve System D. Federal Deposit Insurance Corporation

all of these are regulators

Factors that cause the demand curve for bonds to shift to the left include A. a decrease in the inflation rate. B. an increase in the volatility of stock prices. C. an increase in the liquidity of stocks. D. All of these. E. only a decrease in the inflation rate and an increase in the volatility of stock prices.

an increase in the liquidity of stocks

That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that these intermediaries

are able to prevent potential competitors from free-riding off the information that they provide.

Financial crises A. are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms. B. occur when adverse selection and moral hazard problems in financial markets become more significant. C. frequently lead to sharp contractions in economic activity. D. are all of these. E. are only are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms and occur when adverse selection and moral hazard problems in financial markets become more significant.

are all of these

A borrower who takes out a loan usually has better information about the potential returns and risks of the investment projects he plans to undertake than the lender does. This inequality of information is called

asymmetric information

When the lender and the borrower have different amounts of information regarding a transaction, ________ is said to exist.

asymmetric information

In the good old days, when you took cash out of the bank or wanted to check your account balance, you got to say hello to a friendly human. Nowadays, you are more likely to interact with a(n) ________ when withdrawing cash.

automatic teller machine (ATM)

The major differences between financial regulation in the United States and abroad relate to bank regulation. Specifically, in the past, the U.S. was the only industrialized country to subject banks to restrictions on

branching

Stage Two of a financial crisis in an advanced economy usually involves a ________ crisis.

banking

The largest financial intermediaries are

banks

(I) The average lifetime of a debt security's stream of payments is called duration. (II) The duration of a portfolio is the weighted average of the durations of the individual securities, with the weights reflecting the proportion of the portfolio invested in each. A. (I) is true, (II) false. B. (I) is false, (II) true. C. Both are true. D. Both are false.

both are true

A rising stock market index due to higher share prices

both increases people's wealth as a result may increase their willingness to spend and increases the amount of funds that business firms can raise by selling issued stocks

An advantage of providing multiple financial services within one financial institution is that it

both lowers information costs and develops broader long-term relationships with customers.

A declining stock market index due to lower share prices

both reduces peoples wealth and as a result may reduce their willingness to spend and decrease the amount of funds that business firms can raise by selling newly issued stocks

Intermediaries who are agents of investors and match buyers with sellers of securities are called

brokers

Stage Three of a financial crisis in an advanced economy features

debt inflation

A higher level of income causes the demand for money to ________ and the interest rate to ________. A. decrease; decrease B. decrease; increase C. increase; decrease D. increase; increase

decrease; decrease

As a result of the subprime collapse, the demand for low -quality corporate bonds ________, the demand for high-quality Treasury bonds ________, and the risk spread ________. A. increased; decreased; was unchanged B. decreased; increased; increased C. increased; decreased; decreased D. decreased; increased; was unchanged

decreased; increased; increased

When the demand for bonds ________ or the supply of bonds ________, interest rates rise. A. increases; increases B. increases; decreases C. decreases; decreases D. decreases; increases

decreases ; increases

If Moody's or Standard and Poor's downgrades its rating on a corporate bond, the demand for the bond ________ and its yield ________. A. increases; decreases B. decreases; increases C. increases; increases D. decreases; decreases

decreases;increases

The nominal interest rate minus the expected rate of inflation

defines the real interest rate

Governments in developing countries sometimes adopt policies that retard the efficient operation of their financial systems. These actions include policies that A. prevent lenders from foreclosing on borrowers with political clout. B. nationalize banks and direct credit to politically favored borrowers. C. make it costly to collect payments and collateral from defaulting debtors. D. do all of these. E. do only prevent lenders from foreclosing on borrowers with political clout and nationalize banks and direct credit to politically favored borrowers.

do all of these

In 1928 and the first half of 1929, prices ________ in the U.S. stock market.

doubled

The loanable funds framework is easier to use when analyzing the effects of changes in ________, while the liquidity preference framework provides a simpler analysis of the effects from changes in income, the price level, and the supply of ________. A. expected inflation; bonds B. expected inflation; money C. government budget deficits; bonds D. the supply of money; bonds

expected inflation; money

According to the January effect, stock prices

experience an abnormal price rise from December to January.

A country whose financial markets function poorly is likely to

experience economic hardship and financial crises

Stock prices since the 1980s have been

extremely volatile

An important lesson from the Black Monday Crash of 1987 and the tech crash of 2000 is that

factors other than market fundamentals affect stock prices.

As the price of a bond ________ and the expected return ________, bonds become more attractive to investors and the quantity demanded rises. A. falls; rises B. falls; falls C. rises; rises D. rises; falls

falls ; rises

The Sarbanes-Oxley Act of 2002 provides for oversight of accounting firms but makes no provisions for increasing the flow of information to financial markets. True or False

false

Corporate bonds are not as liquid as government bonds because

fewer bonds for any one corporation are traded, making them more costly to sell.

The main sources of financing for businesses, in order of importance, are

financial intermediaries, issuing bonds, issuing stocks.

A ________ is a type of loan that has the same cash flow payment every year throughout the life of the loan.

fixed payment loan

Which of the following led to the U.S. financial crisis of 2007-2009? A. Financial innovation in mortgage markets B. Agency problems in mortgage markets C. An increase in moral hazard at credit rating agencies D. All of these E. only Financial innovation in mortgage markets and Agency problems in mortgage markets

only Financial innovation in mortgage markets and Agency problems in mortgage markets

According to the efficient market hypothesis

only one cannot expect to earn an abnormally high return by purchasing a security and information in newspapers and in the published reports of financial analysts is already reflected in market prices are true.

If the optimal forecast of the return on a security exceeds the equilibrium return, then

only the market is inefficient and an unexploited profit opportunity exists are true.

The concept of adverse selection helps to explain A. which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets. B. why indirect finance is more important than direct finance as a source of business finance. C. why direct finance is more important than indirect finance as a source of business finance. D. only which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets and why indirect finance is more important than direct finance as a source of business finance. E. only which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets and why direct finance is more important than indirect finance as a source of business finance. Feedback

only which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets and why indirect finance is more important than direct finance as a source of business finance

The concept of ________ is based on the notion that a dollar paid to you in the future is less valuable to you than a dollar today.

present value

When a market bubble occurs,

prices of assets rise well above their fundamental values

The purpose of diversification is to

reduce the volatility of a portfolio's return.

Bonds whose term to maturity is shorter than the holding period are also subject to

reinvestment risk

When the corporate bond market becomes more liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________. A. right; right B. right; left C. left; left D. left; right

right;left

A steep upward-sloping yield curve indicates that short-term interest rates are expected to

rise moderately in the near future.

During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________. A. falls; right B. falls; left C. rises; right D. rises; left

rises;right

Leading up to the 2007-2009 Financial Crisis, the ________ process, along with computer technology, enabled the bundling of smaller loans (like mortgages) into standard debt securities.

securitization

The conflict of interest in credit-rating agencies arises because ________ pay to have securities rated and, as a result, the agencies' ratings may be biased ________. A. security issuers; downward B. security issuers; upward C. investors; downward D. regulators; upward

security issuers; upward

An arrangement with a broker to borrow stocks from them and then sell it in the market, with the hope that they earn a profit by buying the stock back again after it has fallen in price is called

short sales.

A debt instrument is called ________ if its maturity is less than a year.

short term

The money market is the market in which ________ are traded.

short-term debt instruments

Which of the following markets is sometimes organized as an over-the-counter market?

stock market, bond market, foreign exchange market, federal funds market

The efficient markets hypothesis is weakened by evidence that

stock prices are more volatile than fluctuations in their fundamental values can explain.

Of the following sources of external finance for American nonfinancial businesses, the least important is

stocks

When the inflation rate is expected to increase, the real cost of borrowing declines at any given interest rate; as a result, the ________ bonds increases and the ________ curve shifts to the right. A. demand for; demand B. demand for; supply C. supply of; demand D. supply of; supply

supply of;supply